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JPMorgan Chase & Co.’s record $13 billion deal to end U.S. probes of its mortgage-bond sales would free the nation’s largest bank from mounting civil disputes with the government while leaving a criminal inquiry unresolved.

The tentative pact with the Department of Justice increased from an $11 billion proposal last month and would mark the largest amount paid by a financial firm in a settlement with the U.S. The deal wouldn’t release the bank from potential criminal liability, at the insistence of U.S. Attorney GeneralEric Holder, according to terms described by a person familiar with the talks, who asked not to be named because they were private.

“To not get the waiver from criminal prosecution is not good,” said Nancy Bush, a bank analyst who founded NAB Research LLC in New Jersey. “What we’re looking for in a settlement of this size is certainty from things like the criminal prosecution of a company. The Street wants certainty.”

JPMorgan Chief Executive Officer Jamie Dimon, 57, personally discussed the deal with Holder after markets closed Oct. 18 as the banker sought to end probes that have beset his firm and resulted in its first quarterly loss under his watch. The agreement, which isn’t yet final, includes $4 billion in relief for unspecified consumers and $9 billion in payments and fines, according to another person briefed on the terms.

Dwarfing Pay

The settlement would amount to more than half of JPMorgan’s record $21.3 billion profit last year, or 1.5 times what the firm’s corporate and investment bank set aside to pay employees during this year’s first nine months. Only seven companies in the Dow Jones Industrial Average earned more than $13 billion in 2012, according to data compiled by Bloomberg. Some portions of the deal, such as relief to homeowners, would probably be tax deductible for JPMorgan.

The outline of the tentative accord was reached during a telephone call between Holder, Dimon, JPMorgan General Counsel Stephen Cutler and Associate U.S. Attorney General Tony West, said the person. The settlement’s statement of facts is still being negotiated.

Bondholder Concerns

Holder told Dimon that a release from the criminal inquiry wouldn’t be forthcoming as part of any deal, said the person familiar with their talks. The accord will probably require JPMorgan to cooperate in criminal investigations of individuals tied to wrongdoing associated with the bank’s mortgage practices, said the person.

Brian Fallon, a spokesman for the Justice Department, and Matt Mittenthal, a spokesman for Schneiderman, declined to comment.

The possible inclusion of homeowner relief has revived concerns among mortgage-bond investors that efforts to ease the financial burdens of millions of Americans may lower the value of instruments held by Wall Street money managers.

The Association of Mortgage Investors, representing mutual funds and pensions, urged Holder in an Oct. 7 letter not to let banks saddle them with costs associated with relief for mortgage borrowers. Banks settling claims of underwriting lapses often service debts in bonds held by others, who can wind up bearing the burden of breaks granted to homeowners.

Talks Intensify

JPMorgan’s push to settle the mortgage probes and other cases required a $7.2 billion charge in the third quarter, causing the bank to report a $380 million loss on Oct. 11. The firm has tapped $8 billion of $28 billion in reserves set aside since 2010 to cover its legal expenses.

Those costs follow three years of record profits that have driven the stock higher. JPMorgan’s shares have climbed 72 percent since the end of 2008, compared with a 48 percent gain in the KBW Bank Index of 24 U.S. firms. On the day the firm reported its quarterly loss, the stock closed little changed. It has since climbed 3.4 percent.

“It looks like they are gradually becoming able to put the past and the crisis behind them,” said Craig Pirrong, professor of finance at the University of Houston’s Bauer College of Business whose research includes risk management. “It’s an expensive history lesson, and they are not out of the woods yet.”

JPMorgan’s push to end the mortgage probes intensified last month after the U.S. Attorney’s office in Sacramento, California, told the bank it was preparing to bring a case. Authorities there already had concluded there were civil violations and opened a criminal probe, JPMorgan said in an August regulatory filing.

Government’s Stance

Dimon spent two hours at the Justice Department in Washington on Sept. 26 to discuss a possible settlement of state and federal probes with Holder, a person familiar with the matter said at the time. During the bank’s talks with senior Justice Department officials, proposals swung by billions of dollars, people with knowledge of the situation said. At one point, officials rejected the company’s offer to pay $3 billion to $4 billion, one person said at the time.

“It almost sounds like a negotiation where the government just kept saying, ‘No. No. No,’ until JPMorgan met their number,” said Peter Henning, a former federal prosecutor and Securities and Exchange Commission attorney who teaches law at Wayne State University in Detroit.

Others involved in the talks of a global deal included the Department of Housing and Urban Development and Schneiderman, who is co-chairman of a federal and state working group on residential mortgage-backed securities, which negotiated the civil-mortgage settlement with JPMorgan.

False Statements

The FHFA sued JPMorgan and 17 other banks over faulty mortgage bonds two years ago to recoup some of the losses taxpayers were forced to cover when the government took control of failing mortgage finance companies in 2008.

The FHFA accused JPMorgan and its affiliates of making false statements and omitting material facts in selling $33 billion in mortgage bonds to Fannie Mae and Freddie Mac from Sept. 7, 2005, through Sept. 19, 2007. Those two firms, regulated by FHFA, have taken $187.5 billion in federal aid since then.

The regulator said executives at JPMorgan, Washington Mutual and Bear Stearns Cos., which were acquired by JPMorgan in 2008, knowingly misrepresented the quality of the loans underlying the bonds, according to the lawsuit filed in federal court in Manhattan.

Dimon said in a speech last year that he did the U.S. a favor by buying Bear Stearns and that he might not go through with it again because of how much the deal ultimately cost.

Settlement ‘Chagrin’

“The settlement probably comes with a sense of chagrin at JPMorgan,” said Joseph Grundfest, a former SEC commissioner who’s now a professor of business and law at Stanford University Law School. “Many of the problematic transactions were done by banks that JPMorgan acquired during the financial crisis at the behest of the U.S. government — not by JPMorgan itself.”

UBS AG, Switzerland’s largest bank, agreed to pay $885 million last month to settle claims it misrepresented the quality of the loans backing $4.5 billion in residential mortgage bonds it sponsored and $1.8 billion of third-party mortgage bonds sold to Fannie Mae and Freddie Mac. UBS was the third bank to reach an agreement with FHFA.

Citigroup Inc. and General Electric Co. both paid undisclosed amounts to settle the regulator’s claims.

Probes Pending

JPMorgan has paid more than $1 billion to five different regulators in the past month to settle probes into botched derivatives trades that lost more than $6.2 billion in 2012. It also settled unrelated claims it unfairly charged customers for credit-monitoring products.

The bank faces an investigation into its hiring practices in Asia. It’s also the subject of a probe by Manhattan U.S. Attorney Preet Bharara into claims it abetted Bernard Madoff’s Ponzi scheme, a person familiar with that matter said.

The six biggest U.S. banks, led by JPMorgan and Charlotte, North Carolina-based Bank of America Corp., have piled up more than $100 billion in legal costs since the financial crisis, a figure that exceeds all of the dividends paid to shareholders in the past five years, Bloomberg data show.

The Obama administration set up the residential mortgage-backed securities working group in 2012 to coordinate a crackdown on deceptive underwriting practices that contributed to the financial crisis.

Schneiderman’s Claims

Schneiderman’s office sued JPMorgan last October over mortgage-bonds packaged by Bear Stearns.

Schneiderman alleged Bear Stearns misled mortgage-bond investors about defective loans backing the securities. The firm failed to fully evaluate the debt, ignored defects uncovered by a limited review and hid that it failed to adequately scrutinize the loans or disclose their risks, according to the complaint.

At the time it was filed, the cumulative realized losses on more than 100 subprime and Alt-A securities that the bank and its affiliates sponsored and underwrote in 2006 and 2007 totaled about $22.5 billion, or about 26 percent of the original balance of about $87 billion, according to the complaint. Alt-A is a term for mortgages that typically didn’t require documentation such as proof of income.

Schneiderman’s office asserted claims under New York’s Martin Act, an almost century-old law that gives the state’s attorney general broad powers to target financial fraud. The bank denied the claims in the case, which is pending in state Supreme Court in Manhattan.

‘Self-Inflicted’

The FHFA alleged in its 2011 lawsuit that the bank misled Fannie Mae and Freddie Mac about the soundness of loans in billions of dollars of residential mortgage-backed securities. The bank didn’t disclose that a significant portion of the loans failed to adhere to underwriting standards and had poor credit quality, according to the complaint.

The number of loans for owner-occupied properties was lower than investors were told, and the bank’s disclosures misrepresented the properties’ value, according to the complaint.

JPMorgan’s rising legal and regulatory penalties don’t mean the company’s bankers are “immoral,” Dimon told an audience Oct. 12 at a meeting hosted by Institute of International Finance, where he acknowledged the bank was working through a series of problems.

“Some are self-inflicted, which we’ve completely confessed to the whole world. Some are obviously industrywide,” he said. “And yes, we’ve had some mistakes. But honestly, you can never expect to have no mistakes. So, we’ve had more than our share.”

The case is Federal Housing Finance Agency v. JPMorgan Chase & Co., 11-06188, U.S. District Court Southern District of New York (Manhattan).

If you feel you are the victim of Mortgage Fraud, please do not hesitate to email or call the The Resolution Law Group (203) 542-7275 for a confidential, no obligation consultation.